Derivatives

Interest rates in Japan have remained at historic lows, as the Bank of Japan continues to hope for inflation of 2% at some time in the future. Meanwhile, both private sector analysts and regulators are starting to take notice of dollar funding demands at Japanese banks. As UST rates increase, this could put some banks…

The Bank for International Settlements (BIS) recently released “Statistical release: OTC derivatives statistics at end-December 2017”. Just looking at notional values, the OTC derivatives market is little changed. But we have long held that the notional value of OTC derivatives tells little about the market. The BIS seems to agree.

“Alpha” in the context of securities lending is itself a controversial term, with some participants arguing that it’s a euphemism for optimizing transaction costs. But in a purely definitive sense, alpha means excess returns, which is what beneficial owners can get by using technology to mitigate those costs while targeting missed opportunities. At the Finadium…

Manmohan Singh and Zohair Alam of the IMF have written an important white paper “Leverage—A Broader View” (March 19 2018, IMF Working Paper WP/18/62) that looks at off-balance sheet leverage. We’ve covered Manmohan Singh’s work for years with good reason – he is often a leading thinker on leverage and collateral matters. This time is…

In the world of tax reform and financial markets, 871m is an important one to keep track of. This change to the US Internal Revenue Code aims to stop an arbitrage by non-US entities trading derivatives and avoiding US withholding taxes. While the initial goal was to enforce tax payments, it is having an unintended…

For more years than we can remember, the promise of Asia as a securities finance marketplace has been bigger than the reality. Without getting too optimistic this time around, there are now some signs that the market may be showing more interest based on evidence from product adoption and our recent research.

Aside from specialist trading desks, the wriggle parameter is little-known in financial markets. Yet, this part of a derivatives formula now plays a critical role in understanding pricing dynamics at major banks. In this article, we explain the wriggle parameter, why it matters and why clients should watch for its impacts in their dealer pricing….

Securities Finance Monitor Magazine, Winter 2018, is now online. This edition, our Technology Special, features articles on what protectionism means for efficiency in global capital markets, a proposal for smart regulation in Europe and the application of artificial intelligence to securities finance. Hard copies will be distributed at Deutsche Borse’s GFF Summit and the PASLA/RMA…

As part of our report this month on Total Return Swaps (TRS), we sized prime broker revenues for physical (cash) financing and synthetic financing. We were aided in this task by key disclosures in bank financial documents and public statements from prime brokerage representatives at recent conferences.

The rationale is justifiable: reduce the regulatory burden for banks with under US$10 billion in assets. But the upshot from a US Senate bill now passed the Senate Banking Committee would allow these banks to engage in proprietary trading activities whereas large banks would still be prohibited. The arb is readily apparent for a subset…

Stock borrowing is an inherent element of any leveraged equities trading strategy. Whether the trade is as simple as a traditional short or as complex as a long hedge against a short sector or ETF play, it will likely involve the borrowing of securities. This is true for both regular physical short sales and derivatives…

In this report, we examine the current state of the Total Return Swaps (TRS) market through conversations with major market participants and a review of bank financial statements. Our conversations indicate market optimism and a certain degree of excitement about TRS, especially in the face of penalizing regulations against cash financing. Our investigation into the…

EMIR wants CCPs to hold more margin, in effect making CCPs into virtual fortresses. But the costs associated are high and the potential to push risk into markets or firms is real. We examine ESMA’s latest consultation paper draft on anti-procyclicality margin measures for CCPs to better understand EU regulatory thinking.

Big banks, established vendors and start-ups are seeing a similar opportunity: technology should be used to get manual and voice transactions into electronic systems for post-trades processing, particularly for collateralized trading products. Augmenting Straight-through Processing (STP) has the potential to reshape key functionalities that touch most capital market professionals on a daily basis. We did…

CCPs have changed or are changing their rules on Variation Margin to allow “settled-to-market” (STM). This is a useful change that will save money, and complements the desire of firms to lower their outstanding capital requirements. This article provides a short primer on STM vs. the older standard, “collateralized-to-market” (CTM).

The European Commission’s proposals to force large CCPs to submit to supervision or even move to the EU may send some shivers down the neck of anyone trading via a CCP. This is a case of regulatory over-reach to make up for the inability of a coordinated international policy. In the meanwhile, the Commission is…

It’s the year 2025. Following the passage of Dodd-Frank and related Basel III capital rules, banks did what they were supposed to do: they reduced Shadow Banking risk by cutting their exposures to physical securities lending and repo transactions. But their leveraged clients still wanted to trade, so they turned to the next logical option:…

Our quarterly presentation on research, news and events. Finadium Securities Finance, Collateral and Derivatives subscription clients can log in and download the presentation here If you are already logged in, please click here to access the presentation.

The US Supplementary Leverage Ratio (SLR) isn’t working very well, that much we know. As a non-risk based measurement of risk, it captures every asset with the same risk weighting whether or not there is any real risk there. The debate is now escalating about what adjustments should be made to reduce the damage.

The US Treasury has released its third major report on core principles for financial markets. The first two covered capital markets and banks; the latest is on asset managers and insurance companies. This report has some important material for not just the future of US asset management and insurance, but also securities finance, collateral and…

The global tri-party market size is US$4.65 trillion, up from US$4.3 trillion in 2014, according to a new survey from Finadium. Tri-party services continue to evolve by product and region, and while one wave of regulatory scrutiny has subsided, another from the market itself is now heating up as competition, cybersecurity and regional trends mean…

Last week the US Treasury released “A Financial System That Creates Economic Opportunities: Capital Markets,” part two of their major review of regulations in financial markets. Here’s our analysis of the report for its potential impact on collateralized trading activities.

The International Swaps and Derivatives Association (ISDA) has resumed its annual survey on margin. Initial Margin (IM) and Variation Margin (VM) requirements on certain types of derivatives contracts are now coming into larger effect across the industry, with the largest Phase I firms coming on-line in September of 2016.

The idea of consolidating equities and fixed income financing desks seems like a logical strategy for banks to use their balance sheet more efficiently, but for clients the results may not be that obvious. In this article, I will talk about Natixis’ recent moves towards desk mergers and how we are already seeing clients receive…

A new rule approved by the Federal Reserve ensures that counterparties can’t terminate derivatives contracts (QFCs) on large banks that that are in default or a resolution process. A proposal from the European Commission wants a moratoria on termination of derivatives for banks that are in default or are heading that way. The same rules…

The International Swaps and Derivatives Association (ISDA) published a comment paper this month regarding stay protocols under the European Bank Recovery and Resolution Directive (BRRD). ISDA has strong concerns about proposed amendments to stay protocols – called moratoria under the BRRD – and the risks this introduces into markets. A big concern is the differences…

LCH announced on August 10th that it will support a new account type representing pledged collateral for it’s SwapClear service. This should help reduce the risk that ownership rights can become blurred by the transit of collateral. It’s a good advance for the markets and one that we expect will be repeated elsewhere.

In what may be a seminal ruling, the Securities and Exchange Commission (SEC) has said that a so-called digital token qualifies as a security under the Securities Exchange Act of 1934. This was a case involving a “crowd governance” scheme on a blockchain, called a Digital Autonomous Organization (DAO), that allowed investors to purchase tokens…

Use the Current Exposure Method, SA-CCR, or just cut out margin from the Leverage Ratio altogether? Answering this question, and soon, is a core challenge and opportunity for global equity derivatives liquidity today. This Finadium report evaluates listed equity derivatives from the perspective of securities financing, and provides a primer on current conditions for collateral…

Financial markets are changing at a rapid pace; from front to back office and across products, anyone can see that today’s markets are not what they were 10 years ago. This is a good thing in many ways, as systemic risks are much reduced due to Basel III and national regulations. At the same time,…

This Finadium research report evaluates the market conditions that are pushing Asian investors towards repo as a mechanism for obtaining cash that can be used as OTC derivatives collateral, especially for trades with international banks. If repo becomes a popular vehicle for raising cash, this may result in a broader shift in Asia away from unsecured…

CM2025 is our series on what capital markets will look like in the year 2025. In this edition, we project the world of securities lending trading eight years ahead. Will electronic markets take over or will there be people making strategic decisions? To look at how securities finance products are traded, a key question to ask…

The Financial Stability Board (FSB) has been busy, with 10 substantive letters and reports released in the run up to the recent G20 summit. For this article, we took a look at the question of trade reporting. There is intense focus on trade reporting of all types – some driven by FSB recommendations, others tangential to…

Title Transfer Collateral Arrangements (TTCA) are executed between parties engaged in bilateral securities lending, bilateral repo or bilateral derivatives. While these arrangements are not new, having been enshrined in regulation as far back as 2002, they are gaining more prominence for two reasons: MiFID II reporting and transparency requirements, and Basel III capital reserve requirements.

Today’s global investment banking market continues to be shaped by the need for innovation and synergies driven by an evolving regulatory landscape. We have identified the Five Cs for success in securities finance for both our clients and ourselves. This framework encourages us that while a constriction in liquidity has been felt industry-wide, nimble and…

The obstacle of regulatory balance sheet restrictions in physical securities finance is prohibiting the normal flow of business. While there is a natural alternative in synthetic financing markets, firms must support a robust identification of global inventory availability in order to grow a cost-efficient business.

A push/pull situation between dealers, ISDA and the buy-side has reached a new crescendo in recent months as Basel Committee/IOSCO rules have forced a large-scale repapering of bilateral Credit Support Annexes. This repapering has been accompanied by a renewed effort by dealers to standardize collateral schedules, a move that has taken up countless hours of…

These are legitimately complex times for hedge funds. Between macropolitical turmoil, negotiating fees and managing their daily activities, hedge fund managers must pay attention to a wide range of factors that have direct and indirect impacts on their business expenses. Nowhere is this truer than in trading and investment strategies: the way that hedge funds…

Financial markets were designed to support the real economy: that’s their job. Within their collateral services offering, Euronext is working to bring commodities and investment funds into the electronic collateralized trading space alongside equities and fixed income. The vision is to promote the use of a wider range of assets for margin requirement coverage and…

The US House of Representatives Financial Services Committee recently passed a revised Financial CHOICE Act for discussion. This is the big Republican plan for repealing/replacing Dodd-Frank rules, including the proposed off-ramp for banks to get rid of OTC derivatives rules and accept a 10% Leverage Ratio (with no RWA). Following our deep dive into the…

The European Union last week proposed simpler and more efficient derivatives rules, a move that is widely accepted as helpful for a wide range of corporations, pensions and smaller banks. This is long overdue – we wonder if this is only fine tuning the rules or is a combination reaction to US deregulation that is sure…

A new research report from Finadium looks at scenarios for a full-blown collateral crisis that could arise over the next two years. These scenarios are all based on real-world situations occurring now; our projections are predicated on one or more levers being pushed in the wrong direction just enough to make the situation acute.

The buy-side has an opportunity to take control of its own collateral activity, bringing both financial and operational benefits. Breaking this process down shows that a robust collection of tools and services are available; buy-side firms do not have to go it alone.

A true story: several years ago at an industry conference, a stock loan trader rose to passionately complain to a vendor panel that he was being overwhelmed by data. While he did not know it at the time, he was talking about the Big Data challenge in securities finance.

Last week brought two pieces of news that focus attention on some of the regulatory challenges that blockchain-based public markets are up against. This has direct implications for trading in collateralized markets like OTC derivatives.

With the latest Financial Stability Board (FSB) announcement, we are left wondering if the recommendations from this once influential institution will be a lot less impactful than they used to be. It seems like the FSB, the economic and policy arm of the G20, has lost part of its punch in the wake of recent…

The Canadian Securities Administrators (CSA) has issued final rules around the segregation of customer collateral used to secure or margin cleared derivatives transactions. The rules apply to all registered clearing agencies (RCA), exempt clearing agencies and clearing institutions (CI) acting directly or indirectly on behalf of customers.

This research report evaluates banking profitability from the fundamentals of measurement to 10 levers for improvement, with an emphasis on financing and derivatives activities in capital markets. We also consider how regulatory changes make it harder than ever to understand which transactions or overall businesses are genuinely profitable, and what can be done about this…